Liberlisation of Fdi and Its Implication

8/12/2019 Liberlisation of Fdi and Its Implication

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LIBERLISATION OF FDI AND ITS IMPLICATION

SUBMITTED BY

KOMAL H SINGH

MCOM PART I

SEAT NO.

ROLL NO. -11

ACADEMIC YEAR2012-13

UNDER THE GUIDANCE OF

PROF. POONAM KAKKAD

SUBMITTED TO

UNIVERSITY OF MUMBAI

NIRMALA MEMORIAL FOUNDATION COLLEGE OF COMMERCE

AND SCIENCE


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DECLARATION

I Komal Singh of Nirmala College of commerce and science, studying in MCom-I

hereby declares that I have completed the project on liberalisation of fdi and its

implication in the academic year 2012-13

The information submitted is the true and original to the best of my knowledge.

Date of Submission

Student signature


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CERTIFICATE

This is to certify that Komal Singh studying in MCom-I at Nimala Memorial

Foundation college of commerce and science, kandivali (E.) has completed a

project on LIBERLISATION OF FDI AND ITS IMPLICATION in the

academic year of 2012-13

This information which is submitted is true and original to the best of my

knowledge.

Signature of principal signaure of coordinator

(Dr. T. P. Madhu Nair) (Dr. Neha Goel)

Signature of Project Guide signature of external examiner

(Prof. Megha Juvekar)


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ACKNOWLEDGMENT

Any project or the task requires the efforts many people without which it cannot be

possible.

I am very much thankful of Prof. Poonam kakkad who have supported me a lot to

complete my project and gave me this opportunity of making the project on A

study on gains from trade

I am very thankful of those people to provide me the best possible information for

my project.

Lastly I would like to thanks to our librarian who have helped me, lot to find out

the information from various books, magazines, journals etc

The help of these people have shown the right path to my project and have

enormously enriched my project.


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TIME TABLE

Sr.

No.

Topic Page no.

1 Introduction of fdi 6-8

2 Histrorical and present scenario of fdi 9-14

3 Liberalisation of FDI policy in India 15-24

4 Debate on FDI 25-27

5 Strong argument, limited evidence 28-34

6 Conclusion 35


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CHAPTER1

INTRODUCTION OF FDI

The wave of liberalisation and globalisation sweeping across the world has opened many

national markets for the international business. Global private investment, in most part, is now

made by multinational corporations (MNCs) also referred to as transactional corporations

(TNCs). Clearly, these transactional organisations play a major role in the world trade and

investments because of their demonstrated management skills, technology, financial resources

and related advantages. Recent developments in the global market are indicative of the rapidly

growing international business. The beginning of the 21st century has already marked a

tremendous growth of international investments, trade and financial transactions along with the

integration and openness of international markets.

Foreign investment is a subject of topical interest. Countries of the world, particularly

developing economies, are vying with each other to attract foreign capital to boost their domestic

rates of investment and also to acquire new technology and managerial skills. Intense

competition is taking place among the fund-starved less developed countries to lure foreign

investors by offering repatriation facilities, tax concessions and other incentives. However,

foreign investment is not an unmixed blessing. Governments investment in developing countries

have to be very careful while deciding the magnitude, pattern and conditions of private foreigninvestment.

Meaning of FDIInvestment in a country by individuals and organisations from other countries is an

important aspect of international finance. This flow of international finance may take the form of

direct investment ( creation of productive facilities) or portfolio investment (acquisition of

securities).

FDI is the outcome of the mutual interests of multinational firms and host countries.

According to the International Monetary fund (IMF), FDI is defined as investment that is made

to acquire a lasting interest in an enterprise operating in an economy other than that of the

investor. The investors purpose being to have an effective voice in the management of the

enterprise, the essence of FDI is the transmission to the host country of a package of capital,


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managerial, skill and technical knowledge. FDI is generally a form of long-term international

capital movement, made for the purpose of productive activity and accompanied by the intention

of managerial control or participation in the management of a foreign firm.

In India, FDI means investment by non-resident entity/person resident outside India in thecapital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or

Issue of securities by a Person Resident Outside India) Regulations,2000.

FDI is usually contrasted with portfolio investment which does not seek management control, but

is motive by profit. Portfolio investment occurs when individual investors invest, mostly through

stockholders, in stocks of foreign companies in the foreign land in search of profit opportunities.

Foreign Direct Investment (FDI) broadly encompasses any long-term investments by an

entity that is not a resident of the host country. Typically, the investment is over a long duration

of time and the idea is to make an initial investment and then subsequently keep investing to

leverage the host countrys advantages which could be in the form of access to better (and

cheaper) resources, access to a consumer market or access to talent specific to the host country -

which results in the enhancement of efficiency. This long-term relationship benefits both the

investor as well as the host country. The investor benefits in getting higher returns for his

investment than he would have gotten for the same investment in his country and the host

country can benefit by the increased know how or technology transfer to its workers, increasedpressure on its domestic industry to compete with the foreign entity thus making the industry

improve as a whole or by having a demonstration effect on other entities thinking about investing

in the host country.

However, the distinction between FDI and portfolio investment is not watertight because

sometimes FDI policy and portfolio investment are intertwined.

1.2Definition of 'Foreign Direct Investment - FDI'

An investment made by a company or entity based in one country, into a company or entity

based in another country. Foreign direct investments differ substantially from indirect

investments such as portfolio flows, wherein overseas institutions invest in equities listed on a

nation's stock exchange. Entities making direct investments typically have a significant degree of

influence and control over the company into which the investment is made. Open economies


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with skilled workforces and good growth prospects tend to attract larger amounts of foreign

direct investment than closed, highly regulated economies.


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CHAPTER-2

HISTORICAL AND PRESENT SCENARIO OF FDI

2.1 Indias Historical Economic Direction and the Rationale for Emergence of FDI as a

Source of Economic Growth

After getting independence in 1947, the government of India envisioned a socialist

approach to developing the countries economy broadly based on the USSR system. The

government decided to adopt an economic agenda that would follow five year plans. Each five

year plan was focused on certain sectors of the economy that the government felt needed to be

developed for the countries progress. The government followed an interventionist policy anddictated most of the norms of running a business by favoring certain sectors and ignoring others.

Until 1991, India was primarily a closed economy. The industrial environment in India was

highly regulated and a license system known as licence raj - was in place to ensure

compliance with the government regulations and directives. Under the Industries Development

and Regulations act (1951) starting and operating any industry required approval - in the form of

a licence - from the government. Any change in production capacity or change in the product

mix also called for obtaining government approval. This led to the development of increasinglycomplex and opaque procedures for obtaining a licence and led to a burgeoning bureaucracy.

The licence system thus shifted lot of power and perverse incentives in the hands of file pushing

bureaucrats (or Babus). This directly led to increased corruption as the procedure for obtaining

a licence was vaguely defined and left open to individual interpretations. In addition, there was

no monitoring system in place to ensure speedy disposal of licence applications. Also, the labor

markets were highly regulated and the government did not allow the companies to lay off its

workers. This meant that even in severe downturns the companies kept bleeding but could not

rationalize its workforce. Eventually these companies - majority of them public sector companies

would become chronically sick and the government kept subsidizing them at huge costs to the

taxpayer.


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One draconian measure was the introduction of the Foreign Exchange Regulation act

(FERA) of 1973 which curtailed foreign investment to 40% in Indian companies. This had a very

adverse impact and companies such as Coca-Cola and IBM exited the country. The impact of

this could be seen in the slow growth of the Indian economy as compared to its neighbors over a

30 year period. Table 1 shows a comparison between the Indian industrial development and that

of some of the other developing countries in the region. From the data it is clear that India lagged

behind other countries in its growth rates over a sustained period of time and this led to increased

poverty. Surprisingly, there were some very strange reasons given for this lag in economic

performance. The excuses went to such ridiculous extents as to the development of a Hindu rate

of return theory which stated that the Hindu rate of return was lower that that of the western

nations and thus a comparison of Indias economic return with that of western nations was

inappropriate

The government also adopted a policy of import substitution and the idea was to help the

domestic industry improve in a safe environment until the local industries could compete

internationally. This was implemented by levying extremely high tariffs or completely banning

imported goods. Table 2 in the appendix shows the nominal tariff rates in effect in 1985. Due to

the governments protection most of the industries failed to catch up with the technological

innovations taking place around the world. As they were shielded from imports due to extremely

high import tariffs the industries had no incentive to improve their operations. This led to a

vicious circular logic where the tariffs were not reduced since domestic companies could not

compete and the high tariffs prevented industries from innovating. Corruption and opaqueness of

the system added to the difficulties and the situation became extremely complex.

2.2 The BoP Crisis

Gulf war broke out in 1990 and the resulting oil shock was enough to trigger a serious

balance of payment (BoP) crisis for India in 1991. The cost of oil imports went up to 10,820crores from the estimated 6,400 crores. Traditionally, India received lot of remittances from the

expatriates working in the Gulf countries and this source also dried up as the migrant Indian

workers were forced to return home due to the war. The problem was compounded due to an

extremely high inflation of about 16% and a fiscal deficit of about 8.5%. The situation was so

severe that India had foreign reserves of only around $1 Billion - barely enough to cover two


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weeks of its payment obligations. Indias credit rating was downgraded as its debt servicing

capability was critically impaired and the government had to pledge its gold reserves to soothe

creditors. Ostensibly, the trigger for the BoP crisis was the oil shock but the deeper issue was

that the governments heavy hand in trying to regulate businesses and to move the country

towards economic progress had failed to produce results and drastic measures were now called

for.

Faced with these insurmountable problems, the Indian government turned to the IMF and

thus began a series of far reaching reforms in the India economy which envisioned transforming

the countrys economy from an interventionist and overly-regulated economy to a more market

oriented one.

2.3 Historical trends in FDI in India

Starting with the market reforms initiated in 1991, India gradually opened up its economy

to FDI in a wide range of sectors. The licence-raj system was dismantled in almost all the

industries. The infrastructure sector which was in dire need of capital welcomed foreign equity.

FDI was especially encouraged in ports, highways, oil and gas industries, power generation and

telecommunication. Consumer goods and service sector which was once completely off-limits

for foreign equity was also gradually opened up. The reserve bank of India set up an automatic

approval system which allowed investments in slabs of 50, 51 or 74% depending on the priority

of the industry, as defined by the government. The foreign investment limits were slowly raised

and some sectors saw the limits raised to 100%.

The reforms thus led to a gradual increase in FDI in India. Table 3 shows the FDI flow to

India after the structural reforms began in 1991. As can be seen from the table, FDI increased

from a non-existent value in the start to about $4 billion a year. It should be noted that till 2000,

the figure of FDI reported actually underestimates the amount of FDI according to IMF

definition. This is because the Indian government had its own definition of FDI and did not

include heads like reinvested earnings, proceeds of foreign listings and foreign subordinated

loans to domestic subsidiaries. But, the government recognized this problem and after a study

undertaken in 2003, the standard definition of FDI as suggested by the IMF was adopted by the

Indian government.


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2.4 Present Scenario

More and more multi-national corporations have come to realize that India is the place to

be. India is the worlds second largest economy (in terms of population) with a total population

of just over one billion, forth largest in the world in terms of GDP ($3.3 trillion) and ranked

twelfth in the world in terms of Gross National Income ($570 billion). It is potentially a very fast

growing market and all the multi-national corporations realize the fact that to take advantage of

this ever growing economy they need to present in the country.

It has been more than a decade since the reforms first began and today in the 21st Century,

India has come a long way from the early days of licence rajandBabus. India has been able to

make its mark in the world standing as a lucrative country for FDI by becoming more and more

competitive on the world standards.

According to the A. T. Kearneys report on the FDI Confidence Index in October 2004,

India was ranked third just behind China and the United States as the choice country for foreign

investment up from its previous rankings of sixth in 2003 and fifteenth in 2002.

Just looking at pure numbers the amount of FDI in the last couple of years have gone up

from $2.3 billion in the year 2000 to $3.4 billion in 2001 and 2002 and eventually $4.3 billion in

the year 2003 and still growing.

All this growth has been achieved through a number so factors amongst which the main

factors are proactive government policy and regulations and favorable economic conditions. One

example would be the favorable conditions such as highly educated but comparatively cheap

labor force for outsourcing to India, services such as customer service call centres and research

and development facilities, which paved the way for so many future incidences of investment.

Other examples include the adoption of numerous Double Taxation Avoidance Agreements with

other countries, creation of numerous Export Processing Zones and Special Economic Zones,

liberalization of trade policies, relaxation in import tariffs in almost all areas and on all products,

increased simplification of the whole investment process by placing more and more sectors on

the automatic approval route with only limited sectors requiring licensing, provision of easy


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availability of information on policies and procedures of FDI and most of all creation of

independent institutions and authorities to assist in the prompt and smooth flow of FDI into the

country.

Some of the key highlights of the current procedures and policies of Investing in India are as

follows:

FDI of up to 100% is allowed in numerous sectors and activities which include mostmanufacturing activities, non-banking financial services, software development, hospital,

private oil refineries, electricity generation (non-atomic) / transmission / distribution, roads &

highways, ports & harbors, hotel & tourism, research and development etc. Only a have been

limited to industrial licensing and a couple being total prohibited e.g. atomic energy, railway

transport etc. Other places where 100% FDI is permitted are for setting up Special Economic

Zone (SEZ) Units and 100% Export Oriented Units (EOU).

There are multiple forms of entry for a corporation depending on its needs and requirementswhich include entry through setting up Joint Ventures, Wholly Owned Subsidiaries, Liaison /

Representative Office, Project Office or Branch Office.

Liberal foreign exchange regulations, under the rule of the Central Bank, namely the ReserveBank of India e.g. all foreign investment and dividends declared thereon is freely repatriable

unless otherwise specified under a particular scheme and through an authorized dealer. Favorable policies for Foreign Institutional Investors (FIIs) looking to just invest and trade

in as well as out of the Stock Exchange under the Portfolio Investment Scheme (PSI). They

have the option of investing in both equity and debt instruments, the only catch being that the

investment has to be split in the ratio of 70:30, and also the other option of declaring

themselves purely interested in debt instruments and then becoming a 100% debt FII.

A mature and favorable taxation system with low customs and excise duties and lowcorporate taxes. It caters for numerous tax holidays or rebates depending upon the sector of

investment and geographical location e.g. there is a tax holiday of 10 years for foreign

investment in infrastructure projects, various projects taken up in certain backward areas in

the North Eastern States and Sikkim, units located in specified zones, projects which are

100% export oriented etc. Moreover India has already entered into a Double Taxation

Avoidance Agreement (DTAA) with 65 other countries, under which the income generated


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in India will be taxed in India and then would not be re-taxed in the home country of the

investor, only the difference in the tax rate between the home country and India would be

payable.

Keeping in mind the growing concern over intellectual property rights, India has been promptto enact numerous rules and regulations e.g. The Patents Act, The Trademarks Act, The

Geographical Indicators of Goods Act and The Designs Act.

To assist in providing a prompt and smooth investment process the Indian Government hasset up numerous independent institutions e.g. The establishment of Foreign Investment

Implementation Authority (FIIA) to assist in the prompt implementation of FDI approvals,

the formation of the Foreign Investment Promotion Board (FIPB) to assess various FDI

proposals and to cater to the grievances and complaints of potential and current investors the

appointment of a Business Ombudsperson and Grievances Officer-Cum-Joint Secretary in

the Ministry of Commerce and Industry.

Also, to ensure adequate and up-to-date information on current policies and procedures isavailable at all time to investors various points of call have been set up which can be easily

accessed e.g. the Secretariat for Industrial Assistance (SIA) has been set up for this particular

purpose. Other means are through the internet on various websites (e.g. http://dipp.nic.in),

online chats, bulletin board services, frequent publications and monthly newsletters.

Focusing in on more recent events in India and specifically in the Banking and InsuranceSector, in previous years the FDI limit in private sector banks was raised to 74% from the

existing 49% and the insurance sector to be hiked from 26% to 49%, but there was a caveat

of only having 10% voting rights irrespective of the shareholding, which was seen as a major

constraint. In 2005, a new regulation namely the Banking Regulation (Amendment) Bill 2005

has been proposed which will give private investors voting rights which will be in line with

their current shareholding. Once this regulation is given the nod, it is likely to increase

foreign investment significantly.
http://dipp.nic.in/http://dipp.nic.in/


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CHAPTER-3

Liberalization of Foreign Investment Policy in India

Liberalization of foreign investment policy is a central component of India's economicreforms. While the need for foreign capital is hardly disputed/ there has been a continuing debate

on the scope, coverage/ and impact of a liberalized foreign investment policy. In this paper/

Tarun Das argues that the debate on foreign investment policy lacks perspective and there seems

to be very little appreciation of the emerging compulsions of the new international economic

order. India's foreign investment policy has certainly become broadbased in recent years/ but it is

still far from complete and further liberalization of foreign investment policy appears / inevitable

in view of the pressures as well as obligations associated with the future global scenario.

Liberalization of foreign investment policy has been a central component of economic

reform in India, introduced in 1991. The first step was to remove the age-old limit of 40 per cent

foreign equity and allow automatic clearance up to 51 per cent foreign equity. Subsequently/ a

series of steps have been taken, encompassing policy as well as procedures, to create an

environment for free flow of foreign capital. Liberalization of foreign investment policy has been

of an on-going nature, and the process is continuing even today. At the time of writing this piece,

i.e. the first week of February 1998, the latest dose of liberalization is that no RBI clearance

would be necessary for projects that have the Foreign Investment Promo tion Board (FIPB) nod.

What is significant about India's foreign investment policy is that it is continuing to be

liberalized, even as the debate on some of its basic premises is very much alive. It has been a

case of increasing liberalization amidst continuing debate. The new policy has generated many

polemics on ideological as well as realistic grounds. Accordingly, it has been one of the most

widely discussed aspects of economic policy under the reform process. The polemics

surrounding the policy makes it obvious that there is still lack of clarity as well as consensus

about some fundamental principles of the policy. What is important to note, however, is that

though it is the most debated aspect of India's new economic policy, the need for foreign capital

is hardly disputed and there is a general agreement on the imperative of a liberal policy. The

debate is primarily about the extent and coverage on the one hand and impact management on

the other. Before we go into these issues and review the policy in the context of the on-going

debate, let us briefly present the broad dimensions of the policy.


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3.1 Main Elements of Foreign Investment Policy

For the first time, we have a broader policy on foreign investment. Prior to 1991, the policy

was not only restrictive but also partial. What was permitted (in a restricted way)

was foreign direct (i.e., equity) investment, or FDI as we call it. Foreigners were not allowed to

invest in the portfolios of the Indian 40 Vikalpa corporates. This facility was available, again in a

very limited way, only to the NRIs and their overseas corporate bodies (OCBs). The present

policy is a broader policy in the sense that it covers equity as well as portfolio investment. With

respect to the latter, the facility is, of course, limited to foreign institutional investors (FIIs) only

and not to every foreign investor. However, the extent of permissible investment is quite

significant. Besides, the coverage of FIIs has been expanded to include practically all sorts of

institutional funds. Further, liberalization of portfolio/asset management operations has opened

up another dimension of foreign investment in India. Coming to FDI component of foreign

investment policy, there has been a paradigm shift, given the highly restrictive nature of the past

policy. In the past, the general policy was not to allow more than 40 per cent foreign equity

participation. Higher equity participation was allowed on condition of availability of

sophisticated technologies and higher export obligation, under 51 per cent and 74 per cent

schemes, for instance. One hundred per cent foreign equity was allowed only in the case of

investment under 100 per cent Export Oriented Unit (EOU) scheme or in the Free Trade Zones

(FTZs). These policies had failed to evoke any enthusiasm among the foreign investors, which is

obvious from the quantum of FDI flow that came into the country till 1991. Apart from the

policy limitation, restrictions were also imposed in the form of procedures that were designed to

completely exhaust the energy and enthusiasm of the limited few, who would have liked to

invest even under conditions of restricted and minority participation. The key element of the

current FDI policy is automatic clearance of foreign investment projects with up to 51 per cent

equity participation. This applies with respect to 34 industries that cover a broad and vast

spectrum of the country's manufacturing sector. The MNCs that were already operating in the

country in these sectors with less than 40 per cent equity ownership due to the earlier policy, and

particularly those who were forced to bring down their equities, have been allowed to increase

their equity stakes to 51 per cent. More than 51 per cent equity is also liberally permitted in these

sectors under the system that prevailed. Applications have to be submitted and permissions


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obtained, but the mechanism for approval has been streamlined to ensure faster clearance. As in

the past, the criteria for allowing more than 51 per cent foreign equity includes the nature of

technology and contribution to exports, but the approach is positive and the thrust is on

faster clearance. The authority to approve applications has been rechristened as Foreign

Investment Promotion Board (FIPB) (as opposed to Foreign Investment Board). The

approval/application ratio has improved significantly since restructuring of the FIPB and

inculcation of a positive mindset. Clearly, the signal is that there is willingness to permit higher

equity participation by the foreign companies. The system of automatic approval up to 51 per

cent has the effect of releasing considerable bureaucratic energy by minimizing the number of

applications to undergo scrutiny, and giving better considerations to applications involving

majority foreign ownership with greater objectivity. This is a sign of pragmatism in our approach

to FDI, an aspect that was virtually missing earlier. Most importantly, dogmatic perceptions are

hardly allowed to determine the structure of ownership and quantum of investment. Further, the

policy of automatic approval up to 51 per cent foreign equity is without any strings in the sense

that such joint venture projects do not have to meet any obligations, nor are subjected to con-

ditionalities. To begin with, a criteria of dividend balancing was introduced to ensure that foreign

exchange expenditures were met out of own earnings, i.e., imports should equal exports, and

there was no net outgo of foreign exchange. This was done with a view to ease pressure on the

country's balance of payment position. However, this requirement was subsequently withdrawn

to make the policy more attractive. Other obligations such as export obligation, indigenization

requirement, etc. are also not imposed. This is another indicator of pragmatism in our approach

to FDI.

3.2 Need for Policy Reform

Many may argue that in our desperateness to attract foreign capital, we have sacrificed

some of the vital objectives that we could have achieved. For instance, the opportunity to use

FDI as a tool for export promotion may appear to have been virtually sacrificed. Similarly, the

objectives that could have been served through indigenization programme may have been

sacrificed to a great extent. Export development, access to foreign technology, transfer of skills

to the locals, development of supporting local enterprises, etc. are some of the benefits that could

be reasonably expected from foreign investment. Seemingly, the new policy that has been


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considerably shaped by the economic exigencies of the late 80s and early 90s has compromised

on many vital objectives. However, the element of pragmatism should be obvious if we take into

account the circumstances under which this policy was adopted. As is too wellVol. 23, No. 1,

January - March 1998 41 known, Indian economy was on the brink of a collapse. Foreign

investment was a critical necessity, but foreign investors' confidence in the Indian economy was

at its lowest ebb. By the beginning of the 90s, most of the developing countries had offered

highly attractive policies to the foreign investors and had engaged themselves in competitive

liberalization. The volume of global FDI outflow had significantly increased between 1985 and

1991, but foreign investors, who were most sought after throughout the developing world, had

plenty of destinations to choose and had their own terms to settle deals. The current FDI policy

takes cognizance of this reality. The writing on the wall for India was practically clear by the

early 90s. A section of the developing countries, represented by the fast-growing economies of

East and South East Asia, was already following market-oriented economic policies and created

glitters that dazed. Foreign investments were pouring in large volumes in China and the whole of

South East Asia. Asia Pacific Economic Cooperation Council (APEC) was formed encompassing

all these economies. India was left out. Foreign investors openly said India did not belong to

Asia. On the other end of the spectrum, the low income developing economies in Asia and Africa

had willingly opened up and even boasted on the speed of their reform process. It is a different

matter though that they were not getting any foreign investment in spite of their efforts. But India

was singled out as virtually a closed economy. The developed countries did not quite turn their

eyes away from India in view of the potential market size and had kept on mounting the pressure

for opening up. But no developing country was willing to side with India in the multilateral fora,

particularly in the Uruguay Round of Traae Negotiations. India's resistance to agreement on

Trade Related Intellectual Properties (TRIPs), Trade Related Investment Measures (TRIMs), and

General Agreement on Trade in Services (GATS) hardly had any supporter. On the domestic

front, the industrial and trade policies were considerably liberalized during 1985-90. There was a

growing felt need for liberal tie-ups with the foreign manufacturers in the face of mounting

competition at home. Accordingly, there was a brewing internal pressure for liberal FDI policy.

And then came the domestic economic crisis, compelling a recourse to IMP'S structural

adjustment loan. Any objective assessment of India's foreign investment policy has to take into

account the compelling pressures of the circumstantial forces prevailing at that time. At the same


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time, it is not correct to say that the present policy was influenced entirely by the circumstantial

forces alone. There were also opinions gathering in favour of India joining the much hyped

globalization. There was no objection, ideological or otherwise, to the imperative of higher

extemalization of the economy through trade liberalization. A positive perspective on the role of

FDI for Indian economy was very much visible. In other words, the internal support base for

liberalization of policy for foreign investment was prevailing. And thus it was ushered in. Not

only that automatic approval facility was allowed for joint ventures with foreign equity

ownership up to 51 per cent, many other changes were introduced by way of regular amendments

in the Foreign Exchange Regulation Act (FERA)'73. For instance, foreign companies were given

liberal permissions to open liais on offices and distribution outlets, facilitating, in the process, an

act of testing the water before taking the plunge. This facility was undoubtedly another mark of

pragmatism and realistic endeavour to attract foreign investment. Some of the large MNCs who

have now significant presence in India did take the advantage of this policy before committing

major investment. Those who do not have good knowledge of India and are still sceptical of

investment outlook may find this policy helpful and strategic. They can get their feet soaked in

the Indian waters before taking further steps. Similarly, as has been already mentioned, though

permission/approval is required, more-than 51 per cent equity is easily granted, so long as the

investment proposals satisfy the broad criteria. The objective is to enhance additionally of

physical assets rather than the structure of ownership, an area that has been left to be decided

between the partners. But the policy, as of now, is much more liberal than this. It grants equally

liberal permission for setting up 100 per cent subsidiaries. It is basically up to the foreign

investors to decide whether he should have an Indian partner (majority or minority) or go ahead

on his own. The entry strategy is entirely up to the foreign investor. He can first test the market

through limited selling, have familiarity, develop market strategy, and then set up 100 per cent

subsidiary. Alternatively, he can enter the market with an Indian partner, if he so wishes. The

policy does save foreign investors the risk of direct plunge into the market, as also the hard

exercise of finding a local partner.


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3.3 New Dimensions of Foreign Investment Policy

One of the new dimensions of foreign investment policy is investment in infrastructure.

The contours of this policy have been dictated by three main factors. First, India's infrastructural

needs are huge. The quantum of infrastructural gaps and the resource requirements has been

estimated by theIndia Infrastructure Report (1996). Second, the public sector is no longer in a

position to meet the requirement all by itself. Third, India needs to have latest technologies in

order to have modem infrastructural facilities. Technological upgradation in the rest of the

economy can be facilitated only with modernization of infrastructure. Accordingly, private sector

participation (domestic as well as foreign) has been a key element of the policy for infrastructure

development. It has taken some years to evolve definitive policy framework and has not been

without hitches, which arose out of lack of necessary understanding of the principles that guide

private investment in infrastructure. However, the policy that has finally evolved is a mix of

international trend in foreign participation in infrastructure and the country's long-term

perspective. The policy permits (i) 100 per cent foreign investment in power, roads and

highways, construction of airports and ports and (ii) 49 per cent foreign equity in telecom. There

is lack of clarity, or rather indeci-siveness, about foreign investment in the railways and civil

aviation. In the case of railways, it is not clear whether foreign investment is welcome or not, and

if welcome, what is the permissible extent of foreign equity. This sector has also managed to

escape any kind of debate. But the civil aviation sector has been a controversial one. Foreign

equity participation up to 40 per cent, subject to approval, is what the government may be willing

to consider, but so far it has not been possible to establish it as a matter of general policy. On the

whole, it can be said that though the government welcomes foreign investment in infrastructure,

the policy is rather sectoral than general in character. Investment in financial sector is another

new dimension of foreign investment policy. Like infrastructure, this sector was also closed to

the private sector, but has been subjected to gradual reform since 1991. So far, there is nothing

that can be called a comprehensive foreign investment policy for financial sector, but three

distinct policy changes have been undertaken. First, the foreign banks are given liberal

permission to open subsidiaries and expand branches, besides wider avenues in

the area of banking operations. Second, foreign non-banking financial companies (NBFCs) have

been allowed to start operations in India, mostly in joint ventures with the Indian NBFCs, though

there is lack of clarity as to the extent of foreign equity participation. The interest is primarily on


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capital adequacy and protection of investors' money, rather than equity. Third, the FIIs are

allowed to invest in the equities of listed Indian companies to the extent of 30 per cent. These are

the broad aspects of foreign investment policy in the financial sector. The question of foreign

investment in the insurance sector has been a subject of considerable debate, but lack of

necessary political support has been a major obstacle to reform. The doors are closed even to the

domestic private sector.

3.4 Emerging Multilateral Requirements

In the background of the past policy framework, the new foreign investment policy

represents a paradigm shift in our approach to foreign investment and our understanding of the

role of foreign capital. At least, it is recognized that foreign investment is crucial to India's

development, and that successful globalization of the economy, which is a key objective of

economic reforms, cannot be achieved without a liberal foreign investment policy. It is also

recognized that foreign investment cannot be restricted only to industrial sector as in the past and

has to be extended to other sectors as well. However, at the threshold of the 21st century and in

the new (post-GATT) international economic order, where globalization is being thrust upon,

one cannot evaluate the policy in the context of the past. The issue today is not whether our

policy''is liberal, or how liberal it is compared to the past policy. The issue is whether our

policies are compatible with the existing, and/or emerging, multilateral requirements. It is not

liberalization but compatibility that matters. Also, what is 'liberal' in our perception may be

inadequate in the context of what we have to, and/or may have to do as a founder member of

World Trade Organization (WTO). Here, we have a lot of obligations to fulfil. Further, we need

to recognize the challenges of WTO. A brief mention of some of these may be useful for

appropriate evaluation of our foreign investment policy. First, let us consider the agreement on

trade related intellectual properties (TRIPs). The obligation is that we have to amend our Patents

Act, which we have yet to fulfil. The obstacle to amendment of the Patents Act is primarily

political, but it is a very serious obstacle. TRIPs is not a purely technological issue, as is

understood by many. Investment implications of TRIPs are equally significant. The pace of

inflow of foreign investment in India would be determined, to a significant extent, by our action

in this front. Failure to amend the Patents Act may affect both the quantum as well as the quality

of FDI into the country. In other words, if we continue to delay amendment of the Patents Act,


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foreign investment policy may remain largely ineffective, even as it may appear liberal in our

perception. A very important point that may emerge from this is that the concept of 'investment'

policy is changing. It is no longer enough to talk of mere investment; instead one has to take into

account almost everything that has something to do with investment. Policies that build or shake

confidence in the minds of the investors, policies that determined the rate of return on

investment, policies that facilitate post-investment activities, and policies that protect investment

are all important from the point of view of a comprehensive investment policy. The point to note,

therefore, is that the extent of permissible foreign equity is just only one of the many criteria of

favourable, or viable, foreign investment policy. In this context, we should take note of the

debate on Multilateral Agreement on Investment (MAI). Organization for Economic Cooperation

and Development (OECD) has already prepared the draft MAI. The WTO is looking into the

issue. Exact multilateral position on the issue would be clearer after the second WTO Ministerial

in May 1998. Assuming that the subject is brought under the purview of negotiation under WTO

and finally an Agreement is reached, we have reasons to feel concerned about the implication

from the point of view of 'foreign' investment policy. The on-going debate on MAI has certain

key elements, of which we shall mention only two. First, foreign investors have to be given

'national' treatment, i.e. there can be no discrimination between 'national' and 'foreign' investors.

In other words, the investment policy for the nationals and the investment policy for the

foreigners cannot be separate. Second, the concept of investment has to be enlarged to give a

wider canvas and scope. While it may take some years before MAI may be a reality, there are

trade related investment measures (TRIMs) in the offing. The negotiations are yet to be

concluded, but the implications are known, i.e., the investment measures that can create obstacles

to trade cannot be applied. In other words, no WTO member can impose such strings to foreign

investment policy as are likely to, or deemed to, create trade obstacles. A question that arises in

this context is about the scope of trade (i.e. trade in goods only or trade in goods as well as

services?). But that is a separate issue. The point is that TRIMs Agreement, when it would

finally come into force, would significantly curtail freedom to decide foreign investment

policy. Similarly, negotiations are also on about agreement on trade in services, that include a

wide range of services including banking and finance, insurance, trade, transport services,

techno-economic consultancy, etc. Agreement on financial services has come into existence, and

in due course, all aspects of commercial services would be covered by multilateral agreements.


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In the case of commercial services, it is important to note that trade and investment go hand in

hand. What it implies is that, with the coming into force of all the agreements under GATS, the

entire set of activities falling within the purview of commercial services may have to be thrown

open to foreign investment. Taken together, all these aspects are likely to exert significant

influence on any country's foreign investment policy. It is significant to note that under the WTO

framework, no policy is looked at in isolation from other policies. And, it is quite appropriate

that an integrated view is being taken. Barriers to trade do not originate only from trade policies,

but from a host of other policies encompassing investment, competition, price, purchase, finance,

insurance, transport, technology, etc. Similarly, investment policy also cannot be thought of in

isolation. The contours of investment policy are widening. Also, it is not going to be a matter of

choice so far as scope and content of investment policy is concerned. Everything is going to be a

matter of multilateral obligation.


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CHAPTER-4

DEBATE ON FDI

4.1 Basic Debate on Foreign Investment PolicyThere is, however, very little appreciation and/orunderstanding in India of the emerging

compulsions of the new international economic order. The question that is relevant, or rather

important, to ask is whether the policy trends are moving in the direction of fulfilling the

emerging multilateral obligations. In this context, one can also discuss the relevance of the

ongoing debate on foreigninvestment policy. Let us first briefly introduce the debate.Ever since

there was a change in policy in favour of higher foreign equity participation, significant

developmentshave taken place in India's corporate world. There was, first, a steady growth in

joint ventures. The Indian corporates did globe-trotting to forge partnerships. The foreign

partners were not difficult to locate. And alarge number of joint ventures came into existence.

But, the subsequent developments were rather unexpected. It was thought that higher foreign

equity would help in forging long-term partnerships, enable access to latest technologies,

develop export capabilities inhigh value-added items, and foster healthy competition.Instead, it

was found that the Indian companies wereincreasingly losing control over their enterprises and

joint ventures had started falling apart. It was also observed that the new FDI policy was not

creating much of new capitalassets, but was giving rise to de-stabilization anduncertainty. We

are not going into 'why' and 'how' of thisdevelopment as it is not the objective of this paper.

However, it is this kind of development that gave rise to serious concern about the growth

prospect of indigenousindustry. This, in brief, is the genesis of 'swadeshi' sentiment that favour

protection to indigenous industry.Given the long experience of colonial rule and the cult ofself-

reliance cultivated since the beginning of economicplanning, the spirit of swadeshi goes well

with the Indianpsyche. There are also ideologues who questioned the direction of FDI flow.

According to them, foreign investorswere found to be interested mainly in low-tech consumer

goods such as potato chips, bubble gums, cornflakes, soapsand toiletries, and were not keen on

exposing India to theworld of high technology. The argument typically is that India does not

need foreign investment in the field of massconsumption goods. What it needs is investment in

'micro' chips and other state-of-the-art technologies. Another line of argument is that it is

primarily in the area of infrastructure that we need foreign investment as the need is felt


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primarily due to the resource crunch. But, in otherareas, there is no justification for allowing

majority foreignownership.The debate has certain untenable assumptions as itsbasis. One such

assumption is that formulation ofeconomic policies is a purely national affair, i.e., it isentirely

up to the nation concerned to decide its policy.This is no longer so. The WTO regime, whether

one likes itor not, significantly curtails a nation's degree of freedom with respect to economic

policies. Objectively speaking,effective multilateralism cannot be established withoutnecessary

compromises on national level economicpolicies. A nation unwilling to make necessary

compromises may have to stay out of multilateralism at a heavy cost to its national economy.

But, India has taken aconscious decision to support multilateralism by being afounder member

of WTO, and thereby made an unwrittencommitment to fulfil the multilateral obligations. As it

appears from the debate, we are either not aware of theimport of our multilateral obligations or

are not ready torecognize the obligations.The second assumption is that we can influence the

investment choices of the foreign investors. Perhaps this ispossible to some extent and under

certain circumstances,but not always. It is not entirely up to the recipient country to decide

where the foreigners should invest. It is notdesirable to do so either. If we open up, say, only

powersector (because that is where we have resource gap) and notthe power consuming sectors,

there may not be anyincentive for investment in power sector, as perceivedpower projects may

not be found viable due to lack ofmarket. We cannot have a foreign investment policy thatmay

create investment as well as market imbalances within the economy A similar argument may

hold good with respect to foreign investment and choice of technology. Choice of technology

and also area of investment in a joint venture is determined by a number of factors, and

particularly by thejoint decision of the partners. More specifically, it is usuallydecided by the

market, and not ideological considerations.The current debate, however, assumes that the market

is an unimportant factor. But the fact is that the market plays a key role in determining the

direction of private (domestic orforeign) investment in a deregulated environment.So far as the

state of indigenous industry is concerned,it has been a case of expectations belied which resulted

from a lack of experience of competitive globalization of the domestic market. It can be best

described as a situationthat one is likely to face in the initial phases of a learningcurve. What is

important to note, however, is that foreign investment does intensify internal competition. In a

country that has a long tradition of industrialization based on development of indigenous

enterprises, the impact of suchcompetition is likely to be more pronounced. This, however, does


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not mean that the interest of domesticindustry may be overlooked. What it means is that along

with liberalization of foreign investment policy, necessarysteps need to be taken to take care of

the initial impact andresponses. Initial responses to opening up do usually reflectmany signs of

immature actions.Clearly, the debate on foreign investment policy lacksperspective, and there is

an urgent need to put theperspectives in place and take due cognizance of the emerging

international scenario as a founder member of WTO. Looked at from the point of view of

challenges andobligations of multilateralism, the following observationsare pertinent:

India's foreign investment policy has, no doubt, become

more broad-based, but is far from complete.

It lacks comprehensiveness and consistency, keeping in view a

wide range of sectors that we may have to expose.

Approach to foreign investment policy is yet to reflect our

concern about the emerging global scenario.


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CHAPTER-5

STRONG ARGUMENTS, LIMITED EVIDENCE

UNCTAD (1998: 108 ff.) argues that globalization has led to a reconfiguration of the ways

in which MNEs pursue their resource-seeking, market-seeking and efficiency-seeking objectives.The opening of markets to trade, FDI and technology flows has offered MNEs a wider range of

choices on how to serve international markets, gain access to immobile resources and improve

the efficiency of production systems (see also Dunning 1999). Reportedly, MNEs are

increasingly pursuing complex integration strategies, i.e., MNEs "increasingly seek locations

where they can combine their own mobile assets most efficiently with the immobile resources

they need to produce goods and services for the markets they want to serve" (UNCTAD 1998:

111). This is expected to have two related consequences regarding the determinants of FDI:

Host countries are evaluated by MNEs on the basis of a broader set of policies than before. The

number of policies constituting a favourable investment climate increases, in particular with

regard to the creation of location-specific assets sought by MNEs.

The relative importance of FDI determinants changes. Even though traditional determinants

and the types of FDI associated with them have not disappeared with globalization, their

importance is said to be on the decline. More specifically, "one of the most important traditional

FDI determinants, the size of national markets, has decreased in importance. At the same time,

cost differences between locations, the quality of infrastructure, the ease of doing business and

the availability of skills have become more important" (UNCTAD 1996: 97). Likewise, Dunning

(1999) argues that the motives for, and the determinants of FDI have changed. According to

Dunning (2002: exhibit 5), FDI in developing countries has shifted from market-seeking and

resource-seeking FDI to more (vertical) efficiency-seeking FDI. Due to globalization-induced

pressure on prices, MNEs are expected to relocate some of their production facilities to low

(real) cost developing countries. Nevertheless, and in contrast to FDI in industrial countries, FDI

in developing countries still is directed predominantly to accessing natural resources and national

or regional markets according to this author. It would have important policy implications if

globalization had changed the rules of the game in competing for FDI. The policy challenge may

become fairly complex; host country governments would have "to provide and publicize a


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unique set of immobile assets, pertinent to the types of economic activity they wish to attract and

retain, vis--vis those offered by other countries" (Dunning 1999: 17 f.). Arguably, policymakers

can no longer rely on the previous empirical literature stressing the overriding role of some

clearly defined factors shaping the distribution of FDI.

Among more traditional FDI determinants, market-related factors clearly stand out. In a

frequently quoted survey of the earlier literature on FDI determinants, Agarwal (1980) found the

size of host country markets to be the most popular explanation of a country's propensity to

attract FDI, especially when FDI flows to developing countries are considered. Subsequent

empirical studies corroborated this finding.6 Even authors who dismissed earlier studies as

seriously flawed came up with results supporting the relevance of market-related variables such

as GDP, population, GDP per capita and GDP growth; examples are: Schneider and Frey (1985),

Wheeler and Mody (1992), Tsai (1994), Jackson and Markowski (1995) and, more recently,

Taylor (2000).7 Chakrabarti (2001), while questioning the robustness of various other FDI

determinants, finds the correlation between FDI and market size to be robust to changes in the

conditioning information set. Against this backdrop, the obvious question is whether the

dominance of market-related factors no longer holds under conditions of proceeding

globalization, while less traditional FDI determinants have become more important. Recent

empirical studies on FDI determinants in developing countries hardly address this question

explicitly. Yet, some of these studies offer at least tentative insights, e.g. on changes in the

relevance of market-related and traderelated variables. As concerns market-related variables,

Loree and Guisinger (1995) find per capita GDP of host countries to be a driving force of FDI

from the United States in 1977, but not in 1982.9 The authors presume that this rather surprising

result is due to a shift from local market-seeking FDI towards more world marketoriented FDI.

This reasoning suggests that the motives for FDI may have changed well before globalization

became a hotly debated issue. However, data constraints prevented Loree and Guisinger from

testing this proposition.

Moreover, industrialized host countries constitute about half of the sample analyzed in this

study. Hence, it remains open to question whether the presumed shift in FDI motives applies to

both industrialized and developing host countries. The results of Tsai (1994), whose sample

consists of developing countries almost exclusively, indicate that the relevance of market-related


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variables did not decline in the 1980s, compared to the 1970s. Econometric tests performed by

UNCTAD (1998: 135140) reveal that, in some contrast to UNCTAD's reasoning elsewhere in

the same World Investment Report, market size-related hardly address this question explicitly.

Yet, some of these studies offer at least tentative insights, e.g. on changes in the relevance of

market-related and traderelated variables. As concerns market-related variables, Loree and

Guisinger (1995) find per capita GDP of host countries to be a driving force of FDI from the

United States in 1977, but not in 1982.9 The authors presume that this rather surprising result is

due to a shift from local market-seeking FDI towards more world marketoriented FDI. This

reasoning suggests that the motives for FDI may have changed well before globalization became

a hotly debated issue. However, data constraints prevented Loree and Guisinger from testing this

proposition. Moreover, industrialized host countries constitute about half of the sample analyzed

in this study. Hence, it remains open to question whether the presumed shift in FDI motives

applies to both industrialized and developing host countries. The results of Tsai (1994), whose

sample consists of developing countries almost exclusively, indicate that the relevance of

market-related variables did not decline in the 1980s, compared to the 1970s. Econometric tests

performed by UNCTAD (1998: 135140) reveal that, in some contrast to UNCTAD's reasoning

elsewhere in the same World Investment Report, market size-related The findings of Tsai (1994)

are surprising in another respect. According to the simultaneous equation model applied in this

study, FDI and the growth of host country exports were positively correlated in the 1970s, but no

longer in the 1980s. One could have expected the opposite pattern as the motives for FDI are

widely supposed to have shifted towards more world market-oriented FDI since the 1980s. The

estimates of Tsai (1994) may rather suggest that host countries' openness to trade represents a

fairly traditional determinant of FDI. The analysis by Lucas (1993) of determinants of FDI in

East and Southeast Asian countries tends to support this view. FDI in 19601987 is found to be

somewhat more elastic with respect to aggregate demand in export markets than with respect to

demand in the host country. Lucas (1993) suspects that the importance of local market size is

overstated in various empirical studies because they omit export markets as a determinant of FDI


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More recent studies typically consider trade-related determinants of FDI:

Singh and Jun (1995) find export orientation to be the strongest variable forexplaining why a

country attracts FDI. Yet, it is somewhat heroic to conclude that their findings are "in line with

the secular trend toward increasing complementarity between trade and FDI" (ibid.: inside

cover). Surprisingly, the study also supports the tariff jumping hypothesis, which is in conflict

with the authors' conclusion.

Gastanaga, Nugent and Pashamova (1998) address the tariff jumping hypothesis in the context

of a panel analysis on the effects of host country reforms on FDI. While cross-section results

suggest that FDI flows were motivated more strongly by tariff jumping than by potential exports,

the effects of import tariffs on FDI tend to be negative in a time-series context. These authors

conclude that "over time in individual countries trade liberalization has become the more

important motive for FDI".

According to the sensitivity analysis of Chakrabarti (2001), openness to trade (proxied by

exports plus imports to GDP) has the highest likelihood of being correlated (positively) with FDI

among all explanatory variables classified as fragile. Asiedu (2002), using the same proxy for

openness, comes to a similar conclusion when separating Sub-Saharan host countries from host

countries in other regions. Africa differs significantly from non-African sample countries with

regard to other FDI determinants, whereas the promotional effect of openness to trade on FDI is

found to be only slightly weaker in Africa. The problem with essentially all these studies is that

they use trade-related variables that are seriously flawed.14 Import tariff rates capture at best part

of the trade policy stance of host countries.15 The ratio of exports plus imports to GDP suffers

from a large-country bias and may, thus, lead to unreliable results. We are aware of just one

recent study on FDI determinants which takes a different route, as we do below, in assessing

openness. Taylor (2000) refers to survey results (from the World Competitiveness Report) on the

degree to which government policy discourages imports. This measure of openness to trade is

shown to be positively related to FDI undertaken by MNEs from the United States. By contrast,

alternative measures tried as proxies of openness (tariff rates, coverage of non-tariff barriers)


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turned out to be insignificant when correlated with FDI. Taylor (2000) resembles most other

studies in that he does not assess changes over time in the importance of openness as an FDI

determinant. His results do suggest, however, that a globalization-induced increase in the

relevance of openness cannot be taken for granted. The positive correlation between openness

and FDI is restricted to the manufacturing sector, whereas the correlation is insignificant for FDI

by MNEs from the United States in the services sector. Considering that the recent boom of FDI

in developing countries is largely because of FDI in non-traded services (see Section I), the

relevance of openness even may have declined. Finally, the study by Noorbakhsh, Paloni and

Youssef (2001) offers insights on non-traditional determinants of FDI in developing countries,

though not with regard to trade-related variables.16 The focus of this study is on human capital

as a determinant of FDI. Most importantly, "the results ... are suggestive of an increasing

importance of human capital through time. The estimated coefficients of the variables used as

proxies for human capital as well as their t-ratios increase in magnitude across the consecutive

sample periods". The authors attribute this finding explicitly to the process of globalization.

Limitations of this study are twofold: The period of observation is restricted to 19831994, and

changes over time are not studied for FDI determinants other than human capital.

Current Challenges and Improvement Areas

As explained above, India is definitely a lucrative place for FDI, but there are certainly

some challenges and areas for improvement still present. Until, these areas are honed to

perfection, India will not become the number one place for FDI. Some of the key areas are listed

below

a) Political risk: Amongst the top items is the political instability of the country. On one handthe fact that India is the worlds largest democracy does add a sense of pride and security, but

the hard reality is that there is insurmountable instability present. Just the fact that the past

two governments have been based on coalitions between a few parties is reason enough to be

skeptical. Moreover, each new government has certain policies which are different from the

ruling government and if there is frequent change in government, this will lead to changes in

policy and increased uncertainty. Just take the example of the last elections in 2004, where

by a sudden change of event the Indian National Congress was able to come into power by


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forming a coalition government, by soliciting the vast majority of the poor people of the

country, surprising the incumbent government which was relying heavily on a fast growing

economy, increased privatization and a thriving middle class.

b) Bureaucracy: Another very important factor that affects Indias competitiveness on theworld standing is the Bureaucracy. Particularly in the FDI process the Indian Government

has already invested a lot of time and effort but there is still a lot of room for improvement in

the identification, approval and implementation process e.g. creating more centres for

assistance, more user friendly processes, effective use of technology, being as clear as

possible leaving no room for interpretation, assisting in identifying new areas for investment

etc.

c) Security risk: Another important factor that needs to be handled with care and worked uponis the ever present security risk. This risk includes the geopolitical risk with Pakistan and the

ongoing dispute over the Kashmir issue, which on numerous occasions has brought these two

countries armed with nuclear weapons to the brink of war. The other security risks would

include incidences of domestic terrorism, not only in the Kashmir valley but also in Assam,

Manipur and Nagaland, where numerous separatists group operate.

d) Cost advantage: One of the attractions of India is the lower cost advantage as compared tomost western economies. The Indian Government would have to work on creating an

atmosphere where this advantage can be maintained else it might result in India not seem as

attractive. One of the key drivers would be to try and control inflation because if there is

increased level of inflation then there would be increased costs and reduced returns. Other

factors which would act in similar respects would be increased tax incentives and reduced

tariffs.

e) Intellectual Property (IP) Rights & Piracy: With the increased instances of Piracy aroundthe world and the extreme importance placed by Investors on maintaining their IP rights, this

is definitely an area which needs improvement in India. India has begun instilling intellectual

property rules and regulations into the country but there is still a long road ahead. The main

area for improvement in this respect is the enforcement, which is the most crucial part but the

weakest at present in the country. The enforcement of IP rights included the increased

crackdown in the market on pirated and knock-downed good.


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f) Privatization and deregulation: Increased privatization of various sectors would definitelyenhance the attractiveness of India as an FDI destination. India has already taken steps to

privatize areas such as electricity, telecommunication etc. and increase the foreign holding

capacity in sectors such as banking and insurance which is a first step.

g) Infrastructure: It definitely is an added bonus to the investor if there is adequateinfrastructure present in the country. In India there is substantial lack of robust infrastructure

around the country, e.g. proper roads, highways, adequate supply of clean water,

uninterruptible supply of electricity etc. But there is a flipside to this lack of Infrastructure.

Quoting the prime minister Dr. Manmohan Singh on a recent speech at the NYSE1,

When I talk to business people, they tell me, Well, Indias infrastructure is a problem. I do

agree with them that infrastructure is our biggest problem and also the biggest opportunity. In

the next 10 years we must invest at least $150 billion to modernize and to expand Indias

infrastructure, and we have major investments needed in energy sector, in power sector, in oil

exploration, in roads programme, in modernizing our railway system, food system, airports.

This is where, I feel, we need a new experimentation with public-private sector participation

because the public sector may have a role, but by itself it cannot meet all the requirements.

As I see an expanding and very profitable role of foreign direct investment in meeting the

challenge of modernizing Indias infrastructure.

So the lack of infrastructure can definitely be seen as a blessing in disguise and be a

substantial source of FDI, but nevertheless if this FDI does not materialize, the Government will

have to invest their own funds into it and try and attract other investments.


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CHAPTER-6

CONCLUSION

We have to accept the challenges of formulating an appropriate and result-oriented foreign

investment policy. The challenge is to reconstruct foreign investment policies in such a manner

that we should be able to fulfill multilateral obligations while still promoting the cause of the

national economy and industry. But, this needs serious deliberation at the policy-making levels.

The problems are two-fold, namely (i) over-hang of the controlled regime and (ii) persistence of

the old mindset. Both seem to be creating obstacles in the form of political resistance to objective

thinking and pragmatic actions. We have already experienced this with respect to reforms in the

insurance and civil aviation sectors. Unless there is improvement in the quality of debate andcircumstances that influence policy formulation, we are likely to confront serious difficulty in the

near future. What needs to be appreciated is that by 2005 when all the GATT Agreements are

likely to come into effect, there would be a tremendous burden of multilateral obligations on us.

There is, thus, some urgency about the reform process, particularly, further liberalization of

foreign investment policy. We may have to do so in the areas so far untouched, namely

agriculture, the entire gamut of commercial services (including retailing and wholesale trade),

real estate development, tourism, etc. So far, we have not given any thought to the possibility of

allowing foreign investment in these areas. But, tomorrow, there may be pressures as well as

obligations.


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1) INTERNET:-

WWW.GOOGLE.COM WWW.SCRIBD.COM WWW.ECONSTER.ED

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FOREIGN DIRECT IVESTMENT IN INDIA (Policies, conditions and procedures)

- Niti bhasin

3)

NEWSPAPER

TIMES OF INDIA
http://www.google.com/http://www.scribd.com/http://www.scribd.com/http://www.google.com/

Documents

Liberlisation of Fdi and Its Implication